Purchasing Power Parity Hypothesis in the Selected African Countries

Purchasing Power Parity Hypothesis in the Selected African Countries

Introduction

This paper explore the long-run absolute purchasing power parity (PPP) hypothesis for a sample of 26 African countries, using both the univariate and the panel unit root tests on annual data for the period 1973-2008. The conventional unit root tests essentially failed to reject the null hypothesis of a unit root in the real exchange rates of the countries which were investigated. Evidence, in favour of PPP for only 7 countries was found. Consequently, a volley of panel unit root tests was employed. The results demonstrated that the null of meanreversion in the real exchange rates of all countries in the sample could not be rejected, implying a breakdown of the PPP in these countries. Therefore, it could be insightful to consider non-linear assessments of adjustment of the exchange rate towards its PPP trajectory. This threshold-type of analysis may convey information useful for policy making.

The Applied Economics Research Centre (AERC), University of Karachi, was established in 1973. The major functions of the Centre are policy oriented Core/academic Research , Contract Research for Clients, and post-graduate teaching and providing advisory services to the government.